Name:
Class:
Date:
chapter 16
Indicate whether the statement is true or false.
1. An involuntary bankruptcy petition is filed by the venture’s management.
a. True
b. False
2. A Chapter 11 bankruptcy filing requires liquidation of the venture.
a. True
b. False
3. Foreclosure is a legal process used by entrepreneurs to avoid diluting their ownership positions.
a. True
b. False
4. Balance sheet insolvency exists when a venture’s total assets exceeds its total debt.
a. True
b. False
5. Asset restructuring involves improving the working-capital-to–sales relationship and/or selling off fixed assets.
a. True
b. False
6. Ventures that reorganize under Chapter 11 bankruptcies may still be liquidated via Chapter 7 bankruptcies.
a. True
b. False
7. A private workout is a voluntary agreement between a venture’s owners and its shareholders that provides for a
financial restructuring of the venture’s outstanding debt.
a. True
b. False
8. About two-thirds of new businesses with employees survive more than two years, and about one-half make it past the
five-year mark.
a. True
b. False
9. A voluntary bankruptcy petition is filed by the venture’s management.
a. True
b. False
10. The transfer of title to the venture’s assets to a third-party trustee is called assignment.
a. True
b. False
Name:
Class:
Date:
chapter 16
11. Operations restructuring involves growing revenues relative to costs and/or cutting costs relative to the venture’s
revenues.
a. True
b. False
12. When one or more creditors refuse to agree to the reorganization terms of a venture in the hopes of making a larger
individual recovery, it is said that a holdout problem has arisen.
a. True
b. False
13. Cash flow insolvency occurs when a venture’s cash flow is insufficient to meet its’ current contractual equity
obligations.
a. True
b. False
14. A cross-default provision provides that defaulting on one loan makes the venture liquidate all other loans.
a. True
b. False
15. A venture in financial distress tries to reorganize under Chapter 7 of the U.S. Bankruptcy Code.
a. True
b. False
16. The common pool problem exists because individual creditors have the incentive to foreclose on the venture even
though it is worth more as a going concern.
a. True
b. False
17. A cross-default provision and an acceleration provision both cause principal obligations on a loan to become
immediately due.
a. True
b. False
18. Balance sheet insolvency exists when a venture has negative book equity or net worth.
a. True
b. False
19. Foreclosure occurs when cash flows are insufficient to meet current debt obligations.
a. True
b. False
20. Financial distress occurs when cash flow is insufficient to meet current debt obligations.
a. True
b. False
Name:
Class:
Date:
chapter 16
21. Balance sheet insolvency exists when a venture has negative net debt.
a. True
b. False
22. A Chapter 7 bankruptcy filing permits a venture in financial distress the opportunity to reorganize.
a. True
b. False
23. Operations restructuring always involves growing a venture’s revenues relative to its costs.
a. True
b. False
24. A debt composition change occurs when creditors reduce their contractual claims against the venture.
a. True
b. False
25. Foreclosure is the legal process used by creditors to try to collect amounts owed on loans in default.
a. True
b. False
26. A prepackaged bankruptcy involves using a combination of a private workout and a Chapter 7 liquidation.
a. True
b. False
27. Cash flow insolvency exists when a venture’s cash flow is insufficient to meet its current contractual debt obligations.
a. True
b. False
28. The two basic options available to resolve a venture in financial distress are restructure or liquidate.
a. True
b. False
29. Increasing revenues relative to current costs is the same thing as cutting costs relative to current revenues.
a. True
b. False
30. During the development, startup, and survival stages of a venture’s life cycle, the relevant financing and operating
decisions faced are either restructuring or liquidating.
a. True
b. False
31. When a venture’s cash flow is insufficient to meet its current contractual debt obligations, asset flow insolvency exists.
a. True
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Class:
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chapter 16
b. False
32. A debt payments extension involves postponing due dates for interest and principal payments.
a. True
b. False
33. An acceleration provision provides that all future interest and principal obligations on a loan become immediately due
when default occurs.
a. True
b. False
34. During the rapid-growth stage of a venture’s life cycle, the relevant financing and operating decisions encountered are
to go public, or to sell or merge the firm.
a. True
b. False
35. A venture is bankrupt when a petition for bankruptcy is filed with a federal bankruptcy court.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
36. Which of the following refers to when a venture has a negative equity or net worth position and/or when its cash flow
is insufficient to meet current debt obligations?
a. insolvency
b. loan default
c. an acceleration provision
d. foreclosure
37. Which of the following refers to changing the contractual terms of the existing debt obligations?
a. a debt payments extension
b. asset restructuring
c. financial restructuring
d. a debt composition change
38. A venture may file for legal bankruptcy in order to attempt to reorganize under which of the following chapters?
a. Chapter 13
b. Chapter 5
c. Chapter 7
d. Chapter 11
39. Asset restructuring involves:
a. improving the working-capital-to–sales relationship
b. growing revenues relative to costs
c. changing the contractual terms of existing debt obligations
Name:
Class:
Date:
chapter 16
d. cutting costs relative to the venture’s revenues
40. Operations restructuring involves:
a. improving the working-capital-to–sales relationship
b. postponing due dates for interest and principal payments
c. selling off fixed assets
d. cutting costs relative to the venture’s revenues
41. Financial restructuring involves:
a. growing revenues relative to costs
b. reducing the cash conversion cycle
c. issuing mortgage debt
d. a debt composition change and a debt payments extension
42. When a venture is in financial distress but believes it has a turnaround opportunity, which of the following will not
apply?
a. operations restructuring
b. asset restructuring
c. private restructuring
d. financial restructuring
43. Which of the following provides that all future interest and principal obligations on a loan become immediately due
when default occurs?
a. insolvency
b. loan default
c. an acceleration provision
d. a cross-default provision
44. During the startup stage of a venture’s life cycle, which of the following is not a basis for operating or financial
decisions?
a. creating and building value
b. choosing the organizational form
c. preparing initial financial statements
d. obtaining startup financing
45. Balance sheet insolvency occurs when a venture has:
a. positive net worth
b. total liabilities less than total assets
c. negative retained earnings but positive net worth
d. total liabilities greater than total assets
46. When a venture files for legal bankruptcy through Chapter 11 and attempts to reorganize, which of the following is
not likely to be a possible outcome?
a. Chapter 7 liquidation
b. a merger
c. asset restructuring
Name:
Class:
Date:
chapter 16
d. reorganization and continuation of operations
47. The rule governing hierarchical order in which claim payments must be made during a bankruptcy is known as the:
a. cram-down procedure
b. absolute priority rule
c. prepackaged bankruptcy rule
d. involuntary bankruptcy rule
48. Which of the following refers to when a bankruptcy court accepts a reorganization plan for all creditors, including
dissenting creditor classes?
a. an automatic stay provision
b. a holdout problem
c. a cram-down procedure
d. net worth requirements
49. During the development stage of a venture’s life cycle, which of the following is not a basis for operating or financial
decisions?
a. screening business ideas
b. preparing the business plan
c. obtaining seed financing
d. managing the ongoing operations
50. Your firm has an average collection period of 36.5 days. Sales revenues are $30,000. What is your firm’s average
investment in accounts receivables?
a. $3,650
b. $3,000
c. $1,000
d. $822
51. When a venture’s cash on hand is insufficient to pay currently due liabilities, this is referred to as:
a. financial distress
b. balance sheet insolvency
c. bankruptcy
d. liquidation
52. A venture may file for legal bankruptcy in order to liquidate the venture under which of the following chapters?
a. Chapter 1
b. Chapter 5
c. Chapter 7
d. Chapter 11
53. Which of the following is not a typical outcome of a Chapter 11 bankruptcy?
a. successful reorganization and the continuation of operations
b. liquidation under Chapter 7 bankruptcy legislation
c. a government bailout resulting in continued operations at the expense of operational independence from the
government
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chapter 16
d. merging the venture with another firm
54. Which of the following provides that defaulting on one loan places all loans in default?
a. insolvency
b. loan default
c. an acceleration provision
d. a cross-default provision
55. The legal process that facilitates a creditor’s ability to collect on loans in default is known as:
a. an acceleration provision
b. a holdout provision
c. foreclosure
d. a private workout
56. The Federal Bankruptcy Reform Act was implemented between:
a. 1900–1902
b. 1930–1932
c. 1978–1979
d. 2008–2009
57. During the rapid growth stage of a venture’s life cycle, which of the following is not a basis for operating or financial
decisions?
a. creating and building value
b. obtaining additional financing
c. choosing the organizational form
d. examining exit opportunities
58. When individual creditors have an incentive to foreclose on a venture, even though it is worth more as a going
concern, it is said that there is a:
a. common pool problem
b. holdout problem
c. solvency problem
d. cram-down problem
59. During the maturity stage of a venture’s life cycle, which of the following is not a basis for operating or financial
decisions?
a. managing ongoing operations
b. maintaining and adding value
c. obtaining seasoned financing
d. obtaining seed financing
60. Operations restructuring involves:
a. growing revenues relative to costs
b. reducing the amount of outstanding debt
c. reducing net working capital
d. reducing the cash conversion cycle
Name:
Class:
Date:
chapter 16
61. Your firm has inventory of $188,000, cost of goods sold of $522,000, and accounts receivable of $214,000. What is
your inventory conversion period?
a. 98 days
b. 152 days
c. 168 days
d. 131 days
62. During the survival stage of a venture’s life cycle, which of the following is not a basis for operating or financial
decisions?
a. monitoring financial performance
b. obtaining seasoned financing
c. projecting cash needs
d. obtaining first-round financing
63. Which of the following refers to the legal process used by creditors to try to collect amounts owed on loans in default?
a. foreclosure
b. loan default
c. an acceleration provision
d. a cross-default provision
64. Which of the following refers to the failure to meet loan interest or principal payments when due?
a. insolvency
b. loan default
c. a cross-default provision
d. foreclosure
65. Which of the following is not considered to be a primary way for resolving financial distress?
a. operations restructuring
b. financial restructuring
c. asset restructuring
d. management restructuring
66. Which of the following restricts the ability of individual creditors to foreclose to try to recover their individual claims?
a. an automatic stay provision
b. a holdout problem
c. a cram-down procedure
d. net worth requirements
67. Financial restructuring involves:
a. improving the working-capital-to–sales relationship
b. growing revenues relative to costs
c. changing the composition of existing debt claims against the venture
d. cutting costs relative to the venture’s revenues
68. Which of the following refers to when creditors reduce their contractual claims against the venture?
Name:
Class:
Date:
chapter 16
a. a debt payments extension
b. asset restructuring
c. operating restructuring
d. a debt composition change
69. Your firm had net sales of $80,000, receivables of $20,000, and a cost of goods sold of $522,000 this past year. What
were the days sales outstanding?
a. 91 days
b. 48 days
c. 36 days
d. 5 days
70. Which of the following refers to postponing due dates for interest and principal on loans and payments on credit
purchases?
a. a debt payments extension
b. asset restructuring
c. operations restructuring
d. a debt composition change
Name:
Class:
Date:
chapter 16
Answer Key
Name:
Class:
Date:
chapter 16
Name:
Class:
Date:
chapter 16